Former Reserve Bank governor Bernie Fraser says the big banks have room to cut their home loan rates but are failing to do so because they put their shareholders' interests ahead of customers.

While lenders argue they are striking the right balance between serving investors, savers and borrowers, Mr Fraser said the big four were putting profits first.

With the banks' run of record earnings continuing in recent months, some analysts predict that competitive pressure will soon force lenders to cut mortgage rates independently.

But Mr Fraser questioned the degree of ''real'' competition in the sector, saying the banks were earning much higher profits than other sectors and their peers overseas.

Advertisement

''It's a question of the relative priority they attach to their shareholders and their customers. That's been the case right through the recent period when they haven't always passed on all the RBA moves,'' Mr Fraser said.

''They've had scope then, they have scope now, to go independently of the Reserve Bank. They've got room in terms of profitability, it's a question of their priority.''

The comments come as a banking academic, Milind Sathye from the University of Canberra, debunked claims that the banks' high cost of funding has forced them to hold back rate cuts.

And a leading sharemarket analyst, Jonathan Mott of UBS, said the banks made so much money from mortgages they risked facing government intervention.

Mr Fraser was governor of the Reserve between 1989 and 1996 and before that secretary of the Treasury under the Hawke Labor government.

The Reserve is widely expected to leave the cash rate unchanged at 3 per cent at its meeting on Tuesday. Home loan customers of the big four have received an average rate cut of 0.93 percentage points in the past year, compared with a 1.25 percentage point cut in the cash rate.

Reserve governor Glenn Stevens told a recent parliamentary hearing there was ''probably'' room for more competition in mortgage lending but there was ''very intense'' competition for deposits.

Mr Fraser said bank profits were ''very, very healthy''. ''I used to think that you can get competition with four good competitors but they're not sort of demonstrating that,'' he said. ''I live in hope that one will take a lead one way and do something a bit more dramatic and spark a bit more real competition.''

Chief executive of the Australian Bankers Association Steven Munchenberg said banks could eventually cut rates independently of the Reserve if funding markets continued to improve.